Global Analysis from the European Perspective. Preparing for the world of tomorrow




Wherever you look, you see a real property bubble

Too high prices on the real property market only concern allegedly the rich and and popular cities. When you consider the case more closely, the bubble risk appears to be threatening also emerging economies.

Rumour about the real property bubble is spreading far and wide in Great Britain, Scandinavia and the Netherlands.1)In Europas Hausmärkten blubbern die Blasen, Handelszeitung 2016-11-28.In its report for the last year, UBS listed Vancouver, London, Stockholm, Sydney and Munich among the cities with especially inflated prices.2)UBS Global Real Estate Bubble Index, 2016.

The reports hardly ever mention that one of the decisive factors causing the rise in prices are the open borders and the excessive immigration. For instance in London alone there live approximately 300 000 Russians who invest, mostly illegal money, in real property.3)Schuld und Sühne auf der britischen Bühne, Gerald Hosp, NZZ 2017-06-30.Apart from Russians it is also the Chinese and people from Qatar who raise the property prices in the British capital and who have long taken over London’s City.4)Jetzt übernimmt Katar auch Londons Finanzviertel, Nina Tretman, WeltN24 2015-01-28.

Pascal Gantenbein, a Basel financial management professor described the risk involved in the following manner: „If the depreciation of currency coincides with a small economic or other crisis, then everything will depend on how strongly property owners have financed their assets with foreign capital. The more they have, the stronger the pressure to sell will be, with the attendant drop in prices.“5)Bieten Immobilien Inflationsschutz?, Pascal Gantenbein, Basler Zeitung 2012-02-28.

The refugees and migrants who arrive in London in droves must be accommodated somewhere, with the exclusion of the rich neighbourhoods. This, too, increases the prices. The less space there is, the higher the price. Besides, a similar phenomenon has been observed in Germany since 2015. The so called refugees, in point of fact re-settlers, cause a rise in property prices in German congested urban areas.6)Flüchtlingsstrom treibt Wohnungspreise in die Höhe, Anne Kunz, WeltN24 2016-01-13.Brexit came just in time for the common people who want to buy a flat or a home in London, and it did not affect the markets so negatively as many a Brussels-based quasi-liberal politician thought it would (unless he invested in property in London). The property prices and rent began to fall and have been falling to this day.7)Mieten in London fallen deutlich, Spiegel online 2017-06-06.A bubble, however, may be created in East Europe of all the places.

In Czechia, Hungary, Lithuania and Poland the interest rate is as low as never before, unemployment smaller than in West Europe. In Czechia, where it amounts to merely 4,1%, the property prices rose within the last three months of 2016 by 10%. And just as in London the proportions are out of balance: in the case of commercial areas only 30% of the local investors participate.8)Bank Austria, Presseinformation 2017-05-22.In Poland more flats were sold in 2016 than before the 2007 crisis. The growing demand is stepped up by low interest rates, cheap state-sponsored mortgage loans for young people and millions of guest workers from Ukraine and Belarus.9)Boom na runku nieruchomości – czy to jest bańka jak 10 lat temu, Michał Bulski, prnews 2017-01-10.If, however, the interest levels grow in the next years, if the government, due to the growing public debt, stops granting cheap credit, and the Ukrainians, who from now on can travel to Germany without a visa, move west10)Freie Fahrt für Ukrainer, Florian Kellermann, Deutschlandfunk 2017-06-12.and thus quit their jobs in Poland, then the market overheating can become painful.

Also the number of the mortgages granted in East and Central Europe is alarming: in Romania it rose by 13% within one year.11)Europe’s next housing boom raises red flags in ex-communist east, Ott Ummelas, Radoslav Tomek, Bloomberg 2017-06-22.The situation on the Czech property market is described by the CEO of the Notenbank as especially risky for the banking sector.12)Czechs clamp down on mortgages, warning boom puts banks at risk, Krystof Chamonikolas, Bloomberg 2017-06-13.Let us then consider why the next crisis is looming large. Flats and homes as well as shopping centres and office premises are purchased first of all by investors who due to low interest rates can see no alternative to the bonds which have become unattractive and to the overvalued stock markets. It does not mean, however, that by the same token there will be built new profitable housing estates accommodating young people who are ready to spend a lot or that there will be built profitable shopping centres full of goods. Much of the real property remains uninhabited because the high prices make their purchase or rent unaffordable. The investors hope that their losses are but temporary or that they will be compensated for by future higher prices. The number of purchasers speculating on the rise in prices is growing and the phenomenon will continue, which means they will expose themselves to a larger risk. An example from North America: In Vancouver, Canada, where the prices rose by ¼ last year, the investors must now pay from 2,5 up to 4 % on bank loans. An amazing bargain, which is why the investors, who are mostly from China, keep on purchasing. Luckily, the government’s response is the imposition of additional tax on foreign investors, just as it is practised in Singapur, where such a policy stabilised the prices. A measure that cannot be taken in Central and East Europe because of the restrictive Pan-European law and open markets.

The situation is alarming in places far away from Europe or America. It is commonly known that apartment prices in Hong Kong are high. The rent for a small six-square-meter flat amounts to 450 euros. In 2019 only 11,5% of all households will be able to pay their increased rent. In the case of an aging society it can mean that, according to the Deutsche Bank, by 2026 real property prices will drop by 48% and the vacancies can increase from 4 up to 9%.13)Hong Kong’s home prices may fall by half in next 10 years, Deutsche Bank says, Sandy Li, South China Morning Post 2017-06-09.If the bubble bursts also on the Chinese mainland, it will have an enormous effect on the overall world’s economy because the share that real estate has in the growth of the Middle Kingdom amounts to almost one third. Here, too, investors have no alternative to real property as investment as the yuan has been systematically weakened by the Notenbank (since the 90-ties). Here, too, it is the migrants, although not from Africa (which is the case in Sweden) but the Chinese from the heartland who contribute to the rise of the apartment prices in congested urban areas. For almost 30 years this process has been accompanied by excessive construction investment, which in many places has led to the creation of large vacancies and also ghost neighbourhoods. In our Bulletin No. 15 we clarify why the construction boom will soon come to an end because of the aging of the Chinese population and the shrinkage of the middle-aged productive cohort.

Fact is that since the latest crisis the prices in the world’s most popular cities have risen dramatically. Still, the global economy has been shrinking continuously since 2007. He who appreciates the cheap money from the central banks had better reconsider: it is these banks that are responsible for the marked real property price increase.

References   [ + ]

1. In Europas Hausmärkten blubbern die Blasen, Handelszeitung 2016-11-28.
2. UBS Global Real Estate Bubble Index, 2016.
3. Schuld und Sühne auf der britischen Bühne, Gerald Hosp, NZZ 2017-06-30.
4. Jetzt übernimmt Katar auch Londons Finanzviertel, Nina Tretman, WeltN24 2015-01-28.
5. Bieten Immobilien Inflationsschutz?, Pascal Gantenbein, Basler Zeitung 2012-02-28.
6. Flüchtlingsstrom treibt Wohnungspreise in die Höhe, Anne Kunz, WeltN24 2016-01-13.
7. Mieten in London fallen deutlich, Spiegel online 2017-06-06.
8. Bank Austria, Presseinformation 2017-05-22.
9. Boom na runku nieruchomości – czy to jest bańka jak 10 lat temu, Michał Bulski, prnews 2017-01-10.
10. Freie Fahrt für Ukrainer, Florian Kellermann, Deutschlandfunk 2017-06-12.
11. Europe’s next housing boom raises red flags in ex-communist east, Ott Ummelas, Radoslav Tomek, Bloomberg 2017-06-22.
12. Czechs clamp down on mortgages, warning boom puts banks at risk, Krystof Chamonikolas, Bloomberg 2017-06-13.
13. Hong Kong’s home prices may fall by half in next 10 years, Deutsche Bank says, Sandy Li, South China Morning Post 2017-06-09.

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